Daily Analysis 29 March 2022 (10-Minute Read)

Hello there,

A terrific Tuesday to you as markets turn up more twists than a daytime soap opera.

In brief (TL:DR)

  • U.S. stocks closed higher on Monday with the Dow Jones Industrial Average (+0.27%), the S&P 500 (+0.71%) and the Nasdaq Composite (+1.31%) all up on the prospect of a ceasefire in Ukraine and slide in oil prices.

  • Asian stocks rose Tuesday as a slump in oil and the prospect of more ceasefire talks between Russia and Ukraine helped improve sentiment.

  • Benchmark U.S. 10-year Treasury yields were steady at around 2.46% (yields rise when bond prices fall).

  • The dollar pushed higher.

  • Oil extended a slide with May 2022 contracts for WTI Crude Oil (Nymex) (-1.00%) at US$104.90 on concerns that China’s mobility curbs due to a rising rate of coronavirus infections will sap demand.

  • Gold fell with April 2022 contracts for Gold (Comex) (-0.63%) at US$1,932.40.

  • Bitcoin (+1.12%) jumped to US$47,429 as technical traders eye the next level of resistance at US$52,000.


In today's issue...

  1. Risk of Recession Increases, as U.S. Federal Reserve Eyes Wrong Curve

  2. Oil Everywhere, But No One Seems to Want It

  3. Bitcoin Blasts Through Resistance, What’s Next?


Market Overview

Global shares are up about 8% from the lows reached after Russia invaded Ukraine and such resilience contrasts with a rout in bonds and inverting yield curves, which are shaking economic confidence.

Investors are trying to parse the war, elevated commodity costs and the central banks fighting against price pressures.

Asian markets were higher Tuesday with Tokyo's Nikkei 225 (+0.60%), Seoul's Kospi Index (+0.27%), Sydney’s ASX 200 (+0.82%) and Hong Kong's Hang Seng Index (+0.75%) were all up in the morning trading session.



1. Risk of Recession Increases, as U.S. Federal Reserve Eyes Wrong Curve

  • Markets expecting the economy to continue growing, put long-term yields higher than short-term yields and hence the curve.

  • Instead of looking at the 5-year, 10-year and 30-year yield spread, U.S. Federal Reserve Chairman Jerome Powell is eyeing the 3-month and 18-month spread.

For those unfamiliar with the yield curve, it’s the slope that measures the rate of change between short-term and long-term bonds.

Typically, yields tend to increase the further out on the timeline bonds go, to compensate investors for the opportunity cost of putting their money in these safe assets.

Markets expecting the economy to continue growing, put long-term yields higher than short-term yields and hence the curve.

When the yield curve “flattens” it means that investors have a less sanguine outlook for the economy, which is why the need to compensate investors in safe assets isn’t as high because of the dearth of higher yielding opportunities.

And unfortunately for investors, it looks like the U.S. Federal Reserve has its eye on the wrong curve.

Instead of looking at the 5-year, 10-year and 30-year yield spread, U.S. Federal Reserve Chairman Jerome Powell is eyeing the 3-month and 18-month spread.

Yet the 2-year and 10-year Treasury yield spread, which is rapidly shrinking, (i.e. short-dated Treasuries yield almost as much as long-dated Treasuries) seems to point towards growing alarm at a looming economic downturn.

In response to a question at the National Association for Business Economics, Powell noted,

“Frankly, there’s good research by staff in the Federal Reserve system that really says to look at the short – the first 18 months – of the yield curve.”

“That’s really what has 100% of the explanatory power of the yield curve. It make sense. Because if it’s inverted, that means the Fed’s going to cut, which means the economy is weak.”

But yield curves represent expectations, not actuality.

And therein lies the problem.

By looking at a very narrow dataset, 3-month and 18-month yields, the Fed is drawing an entirely skewed perspective when it comes to long-term expectations for the economic picture.

Historically, markets have been able to take on inflation, geopolitical risks and policy tightening in their stride, just not all at once.

In almost all of the cases where inflation, geopolitical tension and policy tightening happened at the same time, the S&P 500 corrected by over 20%, or what many recognize to be a bear market.

And that could be a problem.

Right now the Fed is so focused on fighting the inflation problem, that it’s cherry-picking the data to support its thesis that the economy can take more aggressive rate hikes – but there’s no guarantee that that is the case and so for investors, the risk of a policy error forcing a sharp correction increases with each passing day.



2. Oil Everywhere, But No One Seems to Want It

  • Oil prices have eased on expectations that the Russian invasion of Ukraine may be winding down.

  • For now, Beijing appears wedded to its zero-Covid strategy, regardless the cost and that could put a medium-term damper on demand.

With oil prices now well above US$100, it would seem peculiar that traders are worried about demand dropping.

And worry they should, because the world’s largest importer of oil doesn’t seem to have as much appetite as one would assume.

Loathe to leave behind its economically-debilitating zero-Covid lockdowns, China has just plunged Shanghai, its commercial heart and city of some 26.3 million into fresh restrictions.

Hot on the heels of closing the gates on its manufacturing core of Shenzhen, itself a city of some 17.5 million, traders are worried that Beijing’s repeated lockdowns will dent long-term demand for crude oil.

Oil prices have also eased on expectations that the Russian invasion of Ukraine may be winding down.

While Kyiv continues to come under siege, Moscow has abandoned some of its military goals such as “de-nazification” as well as focusing its siege on the eastern region of Ukraine, in the Donbas.

Kyiv also appears willing to compromise, with Ukrainian President Volodymyr Zelensky open to discuss Russian demands such as pledging to remain neutral and abandoning its drive to join NATO if Russian troops are withdrawn.

A possible end to the Russian invasion could see easing pressures on commodity prices, but it’s less clear whether Russian oil will come back onto global markets as quickly thereafter and what the consequences of Moscow’s unprovoked invasion will be.

The price of oil has been all over the place over the past few weeks, whipsawed between the Russian invasion of Ukraine and the attack on a Saudi oil storage facility by Houthi rebels, to the lockdown of some of China’s largest cities, predicting the price of oil seems an exercise in futility.

For now, Beijing appears wedded to its zero-Covid strategy, regardless the cost and that could put a medium-term damper on demand.



3. Bitcoin Blasts Through Resistance, What's Next?

  • Having wiped away all of this year’s losses, Bitcoin is now starting afresh, amidst a broad rally for cryptocurrencies and generating hopes that it could soon surpass the US$50,000 level.

  • Bitcoin is also in the overbought zone, and technical analysts have noted that each time Bitcoin has entered that region, has normally led to stronger rallies in the subsequent 6-month period.

Now that Bitcoin has convincingly blast through the strong resistance at US$45,300, many investors are asking what’s next for the benchmark cryptocurrency, with bulls looking immediately at the US$52,000 level.

Having wiped away all of this year’s losses, Bitcoin is now starting afresh, amidst a broad rally for cryptocurrencies and generating hopes that it could soon surpass the US$50,000 level.

Some analysts suggest that Bitcoin’s next level of resistance isn’t US$50,000 but in fact US$52,000 and should it be able to scale that hurdle, make it all the way to US$65,000, not far from the all-time-high it reached last November.

Bitcoin is also in the overbought zone, and technical analysts have noted that each time Bitcoin has entered that region, has normally led to stronger rallies in the subsequent 6-month period.

While Bitcoin has generally traded a tight range as the U.S. Federal Reserve and other central banks started to withdraw monetary stimulus from frothy markets, the steady advance over the past several weeks has some Bitcoin bulls hopeful that the best is yet to be.

Part of that optimism stems from comments from the U.S. Treasury Secretary Janet Yellen, who said in an interview with CNBC last week that despite her own skepticism about cryptocurrencies, “there are benefits from crypto and we recognize that innovation in the payment system can be a healthy thing.”

Although most other financial assets can be expected to experience sharp corrections if overbought, these technical markers have yet to become headwinds for the Bitcoin and part of the reason of course is that like a chimera, Bitcoin is malleable to various investment narratives.

If markets get hammered, Bitcoin can be talked up as a “haven” asset and if risk assets rally, some of that risk-on sentiment will spillover into the cryptocurrency space as well.

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